Most Defaults Outside of Finance Happen in Developed Nations

Venezuela’s state oil company Petroleos de Venezuela was last year’s biggest emerging-market defaulter, according to Moody’s.

Photographer: Wil Riera/Bloomberg

Developed nations account for 9 of every 10 defaults outside the financial industry in the past two decades, according to a report by Moody’s Investors Service.

That skew reflects the much-higher number of rated entities in the U.S. and includes a big chunk of lower-tier speculative grade issuers. While emerging-market companies tend to get hit by currency volatility as well as sovereign and banking crises, the implosions in developed nations most often sprout from industry trends, competition or aggressive financial policies that undermine capital structure, Moody’s analysts Richard Morawetz and Daniel Gates wrote in the note.

The title of 2017’s biggest emerging-market defaulter goes to state oil company Petroleos de Venezuela, which missed interest payments on more than $20 billion in debt. Latin America accounted for more than half the total, with Brazil, Mexico and Argentina ranking among the countries with the most defaults. The region was followed by Asia-Pacific and emerging markets in Europe, the Middle East and Africa.

Key Points

Of 1,716 defaults for non-financial companies, including utilities, almost 1,600 happened in advanced economies; U.S. defaults were just under 1,300 for the period

Moody’s sees the default rate falling this year to 1.7 percent, well below its long-term average of 4.2 percent since 1983; there was a surge in defaults in 2016 to the highest level since the financial crisis because of the drop in energy prices

“The global economy is in better shape now than it has been for a number of years,” says Richard Morawetz, senior credit officer for the corporate finance group. “These factors are the basis for our low default rate forecast this year for speculative grade companies.”

Average annual corporate default rate for advanced economies was 2.4% from 1998 to 2017, while it was 3.7% for emerging economies; the difference is largely due to a spate of sovereign crises at the start of the review period, which led to record default rates in emerging markets